Investors eye Federal Open Market Committee for QE2 details

Sterling fell sharply versus the euro on Tuesday after UK construction PMI data came in softer thanmarketforecasts and with sovereign selling putting additional pressure on the pound. Activity growth in Britain’s construction sector slowed more than expected in October to its weakest in eight months. The Markit/Chartered Institute of Purchasing and Supply construction PMI fell to 51.6 in October from 53.8 in September, against expectations for a more modest easing to 53.0. Despite this, a more positive outlook for the economy of late has reduced calls for the Bank of England to implement a fresh round of quantitative easing measures to support the economy.

The Bank of England’s November monetary policy decision, due on Thursday, was not expected to contain any surprises, despite MPC member Adam Posen’s call in October for fresh easing steps.

USD

The US dollar fell on Tuesday but analysts warned of a possible rebound if the Federal Reserve disappoints markets at the end of its policy meeting on Wednesday.

Some analysts believe that a Republican victory could be positive for the US currency on market hopes for increased fiscal austerity and less government regulation. With the results out this morning showing a Republican win of 57 seats in the House of Representatives, this remains to be seen. However, most investors have looked beyond the elections and focused instead on a two-day meeting of the US central bank’s Federal OpenMarket Committee, which looks set to announce a second round of monetary easing on Wednesday.

Expectations have centred around an initial commitment from the Fed to buy at least $500 billion in Treasuries over five months, which was less than the $1 trillion size some traders had initially estimated. However, much uncertainty surrounds the scope and pace of the purchases.

Analysts said the risk of a dollar recovery is building after the greenback has lost about 8 percent against a basket of major currencies since the start of September on expectations the Fed will purchase more assets, a move that would pressure US yields and diminish the return on dollar-denominated investments.

EUR

In European deals on Tuesday, the euro extended its gains against the currencies of US, UK and Japan as a report showed that Eurozone’s manufacturing PMI recovered from an 8-month low in October.

Eurozone manufacturing activity improved more than initially estimated in October, survey results from Markit showed today. The final Purchasing Managers’ Index for October rose to 54.6 in October from September’s eight-month low of 53.7. The flash estimate for October was 54.1.

AUD

Aussie hits parity vs US dollar for second time since 1983 on Tuesday after Australia’s surprising interest rate hike and positive economic news in the Eurozone.